The two-notch downgrade reflects the aggressive investments and capital structure and the weaknesses in SHL’s liquidity profile and financial metrics which are not considered appropriate for its previous ‘BBB+(lka)’ ratings.
The maintenance of the ‘BBB-(lka)’ ratings are subject to SHL adequately addressing its liquidity, capital structure and financial flexibility; this is reflected by the placement of the ratings on RWN.
Materially Weaker Credit Metrics: SHL’s leverage (defined as total adjusted debt net of cash / operating EBITDAR) and interest coverage of 8.2x and 0.9x respectively at FY14 (ending March 2014; FY13: 5.3x and 1.0x, FY12: 3.8x and 2x respectively) are materially weaker than Fitch’s earlier expectations, which also takes into account some meaningful improvement in the total indebtedness from monetisation of certain assets of the group, as guided by the company. SHL’s recent acquisition of a 45% stake of Odel PLC, as announced on 11 September 2014, is expected to further increase its debt levels, at least in the near-term.
Weakened Liquidity Profile: SHL is currently exposed to a high level of short-term debt. Debt amounting to LKR5.3bn (at end June 2014), comprising mainly of commercial paper (LKR3.9bn), is due to mature in one year. SHL appears to have good access to bank loans and benefits from a reasonable level of unencumbered assets, mainly consisting of unpledged shares of subsidiaries in the healthcare and financial services sectors. As part of its debt re- organisation plan, SHL expects to refinance the short-term debt with longer-term loans and re-pay some debt using cash flows from the monetisation of certain assets.